Insulin Drugs — Total Expenditure under Simultaneous Shifts, and Policies to Reduce Price

Answer

Part (a)

Total expenditure on insulin is price multiplied by quantity bought. Two forces act at once: more diabetics raise demand, while dearer raw materials lower supply.

The rapid rise in diabetics shifts demand right by a large extent, raising equilibrium price and quantity — raising total expenditure. The higher input cost lowers profitability and shifts supply left, raising price but lowering quantity; the effect on expenditure here depends on PED. Since insulin is a necessity with no close substitutes, demand is price-inelastic: the price rise outweighs the less-than-proportionate fall in quantity, so the supply fall also raises total expenditure.

Market for insulin. Demand rises D₁→D₂ (more diabetics) and supply falls S₁→S₂ (higher input costs). Because demand rises by more than supply falls and demand is price-inelastic, both equilibrium price and quantity rise, and total expenditure rises sharply from 0P₁AQ₁ to 0P₂BQ₂.

Because the demand increase (a rapid rise in diabetics) outweighs the supply fall, equilibrium quantity rises as well as price, so the simultaneous shift raises total expenditure sharply. This large rise in spending on an inelastic necessity hits millions of dependent diabetics — hence the case for the Indian government to intervene to reduce the price.

Part (b)

The thesis is that no single instrument is adequate: a price ceiling and a subsidy each lower the price but carry serious drawbacks, so the government should combine a fast-acting short-run measure with a structural long-run one, guided by a cost–benefit assessment.

Price ceiling — fast but distorting. A maximum price below equilibrium reduces the price of insulin immediately, directly benefiting diabetics.

Price ceiling on insulin. A maximum price P_max below equilibrium P_e raises quantity demanded to Q_d and lowers quantity supplied to Q_s, creating a persistent shortage Q_d − Q_s.

Its merit is speed and ease of implementation. But at $P_{max}$ quantity demanded exceeds quantity supplied, creating a persistent shortage; some diabetics cannot obtain the drug and may turn to a black market where the price exceeds the original equilibrium, leaving them worse off. Lower prices also cut producers’ revenue and so their incentive to innovate, and some may withdraw investment, raising unemployment. A price ceiling is therefore at best a short-run measure.

Subsidy — no shortage, but costly. Subsidising healthcare providers lowers their cost of supplying insulin, shifting supply right and lowering the equilibrium price without creating a shortage.

Subsidy on insulin. A per-unit subsidy shifts supply right S₀→S₁; with price-inelastic demand the equilibrium price falls substantially from P₀ to P₁, benefiting diabetics, while quantity rises.

Because demand is inelastic, the price falls by a large extent, benefiting consumers. But the subsidy is costly: it may widen India’s budget deficit, require higher taxes (with disincentive effects on work and productivity), and carries an opportunity cost — funds diverted from education or other sectors.

Tackling the root cause. Neither measure addresses the underlying cause if the high price stems from limited competition: where producers have market power they restrict output to raise price. Permitting more generic producers to enter would erode that power and lower the price durably — the long-run remedy — though at the cost of lower producer profits and possibly less R&D.

Judgement. The Indian government should combine instruments rather than rely on one. A price ceiling or subsidy is needed for immediate relief to millions of dependent diabetics — with the subsidy preferable to the ceiling because it avoids the shortage and black-market harm, provided the budget permits — while greater competition among producers is the long-run structural fix for the root cause. The choice rests on a cost–benefit assessment weighing the budget constraint, the labour-market and opportunity costs of subsidies, and the shortage and investment-flight risks of a ceiling. The defensible stand is a sequenced package: subsidy for speed, easing of entry barriers for durability.